Solar stocks seem to be back in vogue, and Daqo New Energy is currently the No. 1-ranked stock in the solar energy industry group.
DQ stock has pulled back from a high of 77.18 and has successfully tested the rising 50-day moving average in what could be a bullish sign.
Daqo Energy is showing green check marks across the board, and today we will look at a bullish option strategy on this China-based solar manufacturer.
One way to gain exposure to a stock without risking too much is via a bull call spread rather than buying the stock outright. This can be a good way to protect precious capital in these volatile markets.
Let's assume a trader has a price target of 80 between now and mid-January.
A bull call spread is created through buying a call and then selling a further out-of-the-money call.
Setting Up DQ Stock Option Spread
Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside.
Going out to January expiration, a 70-strike call option was trading around $11.40 on Friday, and the 80 call was around $8.10.
Buying the 70 call and selling the 80 call would create a bull call spread. The trade cost would be $330 (difference in the option prices multiplied by 100), and the maximum potential profit would be $670 (difference in strike prices, multiplied by 100 less the premium paid).
A bull call spread is a risk defined strategy, so if DQ stock closes below 70 on Jan. 20, the most the trade could lose is the roughly $330 premium paid.
Potential gains are also capped above 80. So, no matter how high DQ stock might go, the most the trade could profit is $670.
Closing The Daqo Stock Trade
In terms of trade management, if the stock dropped below 60, I would consider closing early for a loss.
Apple is another stock that looks strong, having crossed above the 200-day moving average. And this option idea from last week continues to perform well.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
